Leveraging the Store

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Leveraging the Store

By Ed Avis - 09/01/2015

Walmart knows a thing or two about leveraging assets.The giant retailer has squared up against online competition with a robust online presence of its own, bolstered by its massive network of brick-and-mortar stores and distribution centers. Amazon Fresh might have an edge when it comes to online shopper awareness, but it's hard to imagine anyone beating Walmart, with its network of 4,500 physical stores, at the distribution battle of that war.

Walmart opened its latest facility, a fulfillment center in Bethlehem, Pa., that is dedicated to filling online orders, in July.

Walmart is at the forefront of using bricks and mortar to support online shopping, but many other grocery retailers are also in the fray. Leveraging those stores may be the best way for them to compete.

"That's where grocers have a leg up on internet retailers. They already have inventory that is close to the customer," says Steve Osburn, a director at consultant Kurt Salmon who has studied the retail supply chain for 18 years.

There are an estimated 38,000 retail grocery supermarkets across the United States. Those physical assets represent a rare advantage for traditional grocery retailers over Amazon Fresh and other online competitors.

Estimates of grocery sales being conducted online are about 3 to 4 percent, but that number is sure to grow in the next decade.

"I think internet grocery sales are going to explode in the coming year," says David Ciancio, senior customer strategist at dunnhumby. "Customers are just much more connected these days. There is so much easier access to online shopping."

Traditional retailers that can tap into that to execute a successful online business–and leverage their bricks and mortar stores–might be able to fend off the big competitors in that field, and maybe even find some new customers.

TWO MODELS

There are two basic models grocery retailers are using to serve their internet customers: click-and-collect and home delivery.

Click-and-collect: This model, whereby customers order groceries online and then pick them up at the store, melds the physical assets of traditional grocery stores with the convenience of internet shopping. Click-and-collect is a major shopping method in Europe and slowly growing in the United States. According to a 2014 study by Market Force Information, 24 percent of shoppers in the UK have used click-and-collect, compared to 5 percent in the United States.

"In countries like France there are some 2,000 click-and-collect stores, so it certainly is a growing trend."

–DAVID CIANCO,

dunnhumby

"In countries like France there are some 2,000 click-and-collect stores, so it certainly is a growing trend," Ciancio says. "It's driven by the need for increased convenience and the abilities of online and mobile shopping sites."

Home delivery: Delivering products ordered online to customers' homes directly competes with Amazon, Peapod, and other online retailers. A brick-and-mortar store may be able to accomplish home delivery more efficiently than a traditional internet retailer because the store is already located near the customer base. Nevertheless, home delivery is the most expensive form of grocery retailing.

"The most profitable transaction, the one that costs the least, is still to have the customer show up at the store, walk the aisles, and buy the product. The second cheapest is for the customer to buy online and pick it up in the store already packaged," Osburn explains. "But home delivery is the least efficient, because delivery costs are the biggest portion of costs for e-commerce. So I think the more that traditional retailers can force a click-and-collect model versus a delivery model, the cheaper their long-term costs will be."

"I think the more that traditional retailers can force a click-and-collect model versus a delivery model, the cheaper their long-term costs will be."

–Steve OSBURN,

Kurt Salmon

THE STORE ADVANTAGE

Whether a store adopts a click-and-collect or home delivery model, leveraging the real estate is key. Here are some advantages that the traditional retailers have over online retailers without stores:

Inventory is already there:The products being sold on a grocer's website are already being stocked for the regular walk-in customers, so special inventory is not needed.

"Most grocery retailers have some kind of warehouse on premise with back stock, and they can use that stock for the online orders," says Greg Wank, practice leader of the Food and Beverage Services Group of accounting firm Anchin, Block & Anchin in New York.

Of particular importance is refrigerated stock. Amazon can ship books and clothing from 1,000 miles away with no problem, but delivering a pound of fresh pork chops is another matter. The local supermarket has the refrigeration to deal with that.

Proximity:Most supermarkets are fairly close to their customers, so orders placed online can be picked up or delivered just as quickly as the store can box them up. Online retailers without local stores rarely have a network of distribution with the proximity that a local supermarket has.

Labor: The work involved in fulfilling online orders–picking, packing, delivering, etc.–costs money, but at least supermarkets have that labor on hand already. And if workers are sometimes not busy, and that time can be used to fill orders instead of doing make-work, the retailer is getting more work done without paying for more labor.

Lower cost of entry:An existing traditional retailer has already invested in a store, warehouse, labor, POS system, etc., whereas a start-up internet retailer faces those costs up front. This is especially true for stores that are otherwise closed at night; why not use that capacity to support online shopping?

However, establishing an effective e-commerce website and the in-store infrastructure to accommodate click-and-collect or home delivery–such as a staging area, loading docks, etc.–does cost money. And when an internet start-up invests $100 million in a project, no one expects quick profits, but when an existing retailer builds a new website and drive-up lane, shareholders want solid returns.

"If you look at Peapod, Webvan, Blue Apron and others, early on they get a lot of capital and investment to drive their business, and they're given a lot of leeway when it comes to profitability," Osburn says. "Traditional retailers are not given that leeway. They're expected to show a profit, so an investment in infrastructure hurts their bottom line quite a bit."

And the equation becomes even more complicated when a retailer's online business increases to the point that a dedicated distribution center is called for, such as those Walmart has opened.

Such centers, called "dark stores" because they are similar to stores but not designed to serve walk-in customers, are designed with high vertically oriented shelves, automated picking equipment, and other efficiencies that make them expensive for typical retailers to build.

THE DISADVANTAGES

In addition to the investment, there are other disadvantages to using a brick-and-mortar store as a distribution point for online sales. These include:

Workers clogging the aisles: Whether a store does click-and-collect or home delivery, somehow the customer orders need to picked and packed. That typically means employees shopping the aisles alongside other customers.

"They have pickers roaming the aisles, and sometimes they are intrusive of other customers," Wank says.

On the other hand, Osburn notes, if picking times are selected to dodge the other customers, the traffic problem can be lessened. "There are plenty of hours in a day where there's not much going on in the store," he says.

Traffic clogging the parking lot: Similar to having pickers clog the aisles, if customers are picking up groceries, their cars are going to be taking up spaces in the parking lot that otherwise would go to regular customers. Even if a dedicated pick-up lane is built, traffic in the general area will increase.

Extra labor expense: As noted above, retailers already have staff on hand, and may be able to arrange their schedules so that they can pick while they otherwise would not be productive. But that's not always the case, so it's likely that labor costs will increase with a click-and-collect model. And there's no doubt they increase with a delivery model.

The risk of online businesses eroding sales at brick-and-mortar stores is real, Osburn says. "I think the grocery space is entering a time when they really have to protect their turf," he says. "Kroger or Publix can't afford to lose 1, 2 or 3 percent volume, because profit margins take a hit when volume falls. So they're going to have to compete with the convenience offered by online shopping."

The use of brick-and-mortar stores as distribution points for online shopping may give traditional grocery retailers a fighting chance against Amazon and other pure internet players. Those online-only businesses have all the virtual advantages, but the local grocer still has the personal connection.

"Amazon's reputation is that they lead in price," Wank says. "But I think what that does is push the local grocers to accentuate their advantages: We've been here for years, and we have a relationship with the customer."